Archrock Inc (AROC) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Hanover Compressor Company first quarter 2004 instruments conference call. With us this morning are Chad Deaton, President and Chief Executive Officer, and John Jackson, Senior VP and Chief Financial Officer. All participants are in a listen-only mode. Today's call is being recorded. If do you not wish to participate please disconnect at this time. Earlier today Hanover released it's financial results for the first quarter ended March 31, 2004. By now you should have all received a copy by fax or e-mail. If you have not received a copy you can find the information on the Hanover Web site at www.hanover.natco.com I want to remind listeners that the news release Hanover issued this morning, the company's prepared remark on this conference call and the related Q&A session include forward-looking statements. These forward-looking statements include projections and expectations of the company and represent the company's current beliefs. Various factors could cause Hanovers results to differ materially from those projected in its forward-looking statements. Information concerning the facts that could cause Hanovers actual results to differ materially from those in its forward-looking statements can be found in the earnings press release as well as the company's SEC Form 10(K) for the year ended December 31 2003, and the company's other SEC filings. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period period. [Caller Instructions]. I would now like to turn the conference over to our host, Mr. Chad Deaton. Mr. Deaton, you may begin your conference.

Thank you. Good morning, ladies and gentlemen, and I would like to welcome you to Hanover's first 2004 conference call. Today we're going to go over our first quarter financial results and then provide an update on some of the operational issues that we are experiencing and the current business conditions. As we've done in the past I will then turn it over to John Jackson who is going to go into detail on the financials later in the call. I am going to focus during my time on some of the key highlights in the first quarter results. First, however, before actually getting into to talk about the quarter I wanted to touch briefly on a couple of subjects. One is some of the progress that we made inputting the nonpast, these past non-operational issues behind us and the other one is progress we made on developing the single corporate culture that we've been working on quite diligently over the last couple years. I am extremely happy to report that, and I am not going to try to talk about the past because the past is past but we were able to settle the shareholder litigation settlement in March.

So now Hanover has successful put behind it all of our major non-operational issues that obviously have plagued us over the last two years. I said it before and I say it again, this company management now really has for the first time since I joined the company able to really focus its energy and the talents that we have in the company are now able to focus on the operations and not on these operational fires. I think this renewed focus you can see it in the company, I think you'd see that it's in our first quarter results and it's in the enthusiasm that you see in the company that the people are performing. Of course we have an issue in the first quarter results with this tax issue which John will talk about more later. It's a little frustrating but I think the first quarter results are a step in the right direction. The seconds point I just wanted to touch about and to me is very important is the culture of this company at Hanover has really changed over the last couple years. We have now fully implemented the geographical business unit or the G.V.U. management philosophy as we call it.

We placed the managers in each of the G.V.U.'s We not only see them stepping up and accepting this philosophy but really fully embracing it as well. I think it's already starting to see some real benefits in the company. An example of this is that we just completed our first what we call Q.P.R or quarterly performance review. We held it on Monday. We had in our heads that the domestic and international operations of, of those two operation and all their respective G.V.U's managers and sales [INAUDIBLE] They met with the senior management team to discuss the current quarter results. We compared these results to the current budget which we set at the end of last year. And we also spent a lot of time discussing the action plans, what we need to do to address any current opportunities or address current issues or problems that we've been faced with. Again since the first time I joined the company this is the first time that a management team has really been able to sit down and have timely reports and actually a stake in the ground to compare how we are doing against a plan or budget.

Another point that it was very impressive in the session is that our operations and sales personal that attended this session clearly demonstrating a great understanding of their market, their challenges, what needs to be done, what's facing us yet. And if you sat in on some of these a year, year and a half ago versus what took place last Monday it would be extremely gratifying to see just how much progress that this team has made over the last two years. Finally before I move on to the highlights for the quarter I also wanted to say that over this last quarter I toured several field locations and manufacturing facilities. And with just a few exceptions it was very encouraging to go see that the overall improvement and morale of our employees compared to some of the previous visits in the third quarter or last summer when we were going through a lot of our consolidation and other things.

I think this attitude is directly attributable to some of the cultural changes that I refer to that are taking place in the company. We've been working quite diligently on this. Several example of that, one: we really been working hard on folks creating one corporate culture and identity. We visit these facilities now it's not like visiting [INAUDIBLE] Canada, [INAUDIBLE] you walk in today, you are visiting an [INAUDIBLE] facility and they are all talking the same language. We see significant improvement in our internal controls in our human resources department and development and training of our employees and I think that's changing the culture and helping us. Third area is we are providing a lot more opportunity for responsibility and accountability. We are providing more of a chance for people to step up to the plate and take a swing. We see a lot of good people that are ready to do this and take on account of their responsibility. We have some that want didn't want to and are no longer with us. Finally I think an example of cultural change, a very good example is that 18 months ago one of my real concerns was the safety performance of the company, dismal at best. If you look at where we start in 2003 in our manufacturing LTIR, the lost time instant rate, in one year from 2003 we have improved by 28% on the LTIR rate.

And in the review that we held on Monday if you look at we continue with the same progress that we made in the first four months of this year we will have a 65% improvement in that same LTIR rate. So I think this is another example that people are a different group. They are looking at things differently and they are responding to the challenges. In the first quarter 2004 results some of the key highlights include a continuing increase in domestic utilization, strong international demand for our products and an improving fabrication backlog. During the quarter we mentioned in the press release that we are able to increase our domestic utilization from 76 to 78% or two-point, and that translates into increasing domestic horsepower of going to work by about 25,000-horsepower. Domestically and if you recall in Q4 of last year we announced something that we were quite proud of at that time that we had been awarded the BP Offshore shelf and Deepwater O&M agreement for the reciprocating power generation and compression.

We are pleased to announced and I am very proud of our team that the first quarter this year we also won an alliance with Conoco Phillips, where we will be one of two companies, they had several companies providing compression for them, they selected two, we will be one of the two companies that will be providing their compression rental fabrication in parts in the U.S. and we are excited to be able to step up and do that for one of the major operators in the country. All this being said at the same time competition domestically we are seeing a pick up in competition. We've seen some new entrants coming into the market. All this being said of course we will protect our market share but at the same time we are continuing to be I think the leader in pricing discipline. And we are very comfortable that our service quality and our performance which we are doing a better job of being able to monitor and track and show the client is going to be one of the key differentiating factor inside helping us continue to win business going forward.

In regards to fabrication, as discussed on the last call our fabrication backlog continues to improve. It's increased from 153 million at year end to 221 million at the end of first quarter. That improvement in backlog was evidence across all the product lines. Fabrication revenues and margins results are still not where we want them but we feel that the improved backlog as it translates into sales revenue will lead to improving financial performance in the fabrication sector. Internationally our rental operations continue to expands. We are able to bring our margins more back in line. They improved from 69, excuse me, 64% in the fourth quarter 2003 to 69% in the first quarter of this year. During that quarter we brought horsepower on line in Argentina, Mexico and Brazil. Going forward in the coming quarter, the second quarter we anticipate bringing on a new project in Nigeria as well as completing the installation of some new compressor stations in Brazil and be adding that horsepower to the system. Demands in South America continues to be strong for all products and services at Hanover. One of the things that we've been saying for the last while is that we feel that Hanover is more than just a compression rental company. In fact we put that on the front page of our annual report.

And I think during the quarter we had again several successes that demonstrated our capabilities to deliver more than just compression. Internationally during the quarter we completed several project management installation projects that generates in excess of $13 million which is reported in our parts and service revenue for the quarter. Also in the quarter we began the fabrication of one of our integrated solutions projects. The project that is for sale in the Middle East in a particular country. Total contract value of this integrated solutions project is $25 million and the planned startup date will be in early 2005. I think this is a very good example of what we've been talking about in integrated solutions. It involves the working with the client early on to look at the gas and designing the system itself, the engineering. We began the fabrication in a couple of our facilities around the world. We are now doing a project management and site surveys and preparing the site. We want to install the LPG facility along with compression and we will commission it and hand it off to the client. But we also signed a long-term operations and maintenance agreement to O&M this plant for this client going forward.

We expect that in country now we will be able to generate additional pull through from this business. With also won new business for Beleli (ph). For critical process equipment for a U.S. refinery which was a major breakthrough for us and we were awarded a contract from the U.S. major who is operating in European refinery to build a first sulphur recovery unit utilizing technology that we have part ownership to our investment last year of Beleli (ph) on the H2S removal process. We continue to see expanding opportunities internationally for all of our products and services and from a geographical standpoint we are moving forward with the staffing of our Moscow office and we have an increased presence in West Coast of Africa and the Middle East. In Russia in particular we have dramatically increased, seen an increase in our bid activity and this is primarily in the gas processing side of the business. And we anticipate we are going to start seeing the benefit of this later on in the year.

Before I turn this call over to John and my voice finally fails we started, we stated last year on our year end earnings call that we are focused on debt reduction and, of course, have always been and will continue to be very focused on capital discipline. During the quarter we reduced our outstandings and our revolver by $21 million and had capital expenditure of approximately $17 million, and John will break that down here in a minute. For the quarter and that compares to $36 million for the same period last year. Also while we were maintaining this discipline we are still able to show some improved EBITDA when compared to both last quarter and the first quarter of last year. We've--, we will continue to remain to be focused on reducing our leverage and, of course, managing our capital more efficiency and we will continue to try to improve our operational and financial performance through improved margins and we want to grow but we want disciplined growth. No doubt I think the first quarter we said from day one that what we wanted to is a series of continuous improvement quarter to quarter. I think 2004 first quarter was an example of that and is one step better and one step in the right direction. We still have a long ways to go but I think there's a lot of excitement that's building here. We is see a good future for Hanover long-term and I think we are positioning ourselves to take advantage of some very good markets around the world in the future. John, I will turn it over to you.

Thanks. I will touch on a few of the highlights on the financial side. Starting with domestic rentals, margins were 59% this quarter as compared to 60% last quarter so they are down slightly. That's a result primarily from increased maintenance expenses as well as some increased start up costs costs to get some of our unions back to work. We don't anticipate that, we anticipate that we will be able to achieve our guidance on margins domestically over the course of this year which is 60 to 63%. So we are still believe that we can move that direction as we continue to show gradual improvement in utilization and cost containment. Also trying to drive on the pricing side. Moving to the international side, our margins were on the 69% range this time. I think our guidance was 65 to 68. Obviously we are at the higher end of that guidance, a little above it. We would anticipate to, for all we see looking forward to be at the higher end of that guidance range but some where around there, the 68% range plus or minus a little bit based won't we see going on right now. We would anticipate to, from what we see looking forward to be at the higher end of that guidance range, but some where around there, the 68% range plus or minus a little bit based on what we see going on right now. Continue to have a stable environment internationally as far as performance, contract renewals and earning stream coming out of there. In the parts and service area we have a couple different pieces that are in here. We have the installation work that we did this quarter that generated about $4 million of gross profit, excuse me, $5 million of gross profit and $4 million of EBITDA. Those were some fairly significant installations across the spectrum that probably won't be of that size in the next quarter but we continue to look for those opportunities and may have those from time to time throughout the year.

Combine that with our parts and service business, the base business itself, this quarter was down from last quarter about $10 million in revenue. We believe that's a combination of a couple things. One, some people pulled data ahead into ,excuse me, spinning ahead into last year and this year started out the year slow and we anticipate seeing it pick up as we move throughout the year. If we move to the fabrication business as Chad has already touched on most of the highlights there I want to talk about margins for a minutes. On the fabrication side we experienced 8% margins this quarter which are relatively flat to last quarter. As that backlog that has increased over the course of the first quarter begins to turn into revenue we would anticipate that the margins and in compression fabrication would move into the range of guidance that we gave of the 10 to 13% range.

We would also on the production of processing fabrication side we would continue to expect to see improvement in the revenue side while maintaining the margins that we are experiencing in the first quarter and possibly some slight improvement there. As we move to G&A, two or three things I'd like to point out here. One is that on that installation work we did internationally we did have a about $1 million of local taxes that are associated with that that did get charged to G&A. That was offset by the fact that we had a contract, a settlement, a contract dispute that we settled in the quarter that was a benefit of a little over $1 million. We actually reached that settlement in late April but we already had accrued the settlement cost in years past. As a result of the settlement getting done prior to the quarter being completed and filed we booked the income back to the prior quarter as required under GAAP. Finally as we look at G&A going forward we would still anticipate if full year to being 160 to 165 range so the run rate we are experiencing right now is right on track with that.

Moving to taxes. In the tax area what we have is we have a situation in the U.S. where we are not in a position where we can record benefit on our U.S. jurisdictional losses at this time. We would hope to be able to plan our way and grow our way out of this situation but we have not done that yet and until we can do that and demonstrate that we won't be able to recognize benefits on our U.S. jurisdictional losses. And the reason those losses really occur primarily in the U.S. is because we are sitting on the entire worldwide debt is in the U.S. along with almost all the idle equipment sits in the U.S. so from a book perspective all the cost of carrying that to support the entire business infrastructure is really carried in the U.S. jurisdiction.

We have some planning strategies that we are in the process of evaluating that we think can begin to mitigate this but just to give you some perspective as we go forward we would expect this to continue to be in the 7 to $10 million a quarter range of unrealized benefit which would translate to somewhere in the 7 to 12 cents per EPS of impact. This is a non-cash effect. We paying or losing cash. Losing the benefit of cash. What we are doing is not realizing a book benefit at this time.

When we can turn the situation around we will be able to realize future benefits as well as be able to turn these benefits around. But as we can't today we can't recognize that. Moving on to liquidity, our bank revolver as Chad said is down from $21 million, we are almost undrawn on our revolver. At the end of April we were actually $10 million drawn instead of $6 million drawn but continue to have ample liquidity under the revolvers, well over $200 million, no significant covenant issues there. We are still well on target from our forward-look to achieve a $60 million cash debt reduction from the depreciation of the shareholder, the settlement note with [INAUDIBLE] has now been marketed in the public market.

On the capital side, as Chad said we spent $17 million in the quarter. We spent $11 million on maintenance, $4 million on growth and $2 million more on administrative things such as Oracle and shop equipment and so forth. That demonstrates to us the fact that we can rein in capital. We can grow our EBITDA. We can grow cash-flow and still maintain our fleet and continue to grow our utilization. I know that our maintenance capital of 50 to 60 is what we talked about and we still feel comfortable with that and we still feel comfortable with our overall guidance of 100 to 150. We have just, for the first time in the history of Hanover to back load capital instead of front load capital until we got out of the box and got the year performing and I think we are off to a very good start here so we should probably see this starting to ramp up a little bit as opportunities presents themselves to spin on the growth side. Finally as far as our '04 guidance and just in summary, what we gave on our year end for '04 guidance related to do capital debt , revenue and EBITDA continues to be the same guidance we wanting to go forward with. We have very comfortable with all 4 of those targets. So with that we will turn it over to questions.

[Caller Instructions]. Our first question comes from James Wicklund with Banc of America Securities.

Good morning, guys. In terms of international, and that's obviously one of the growth areas, what is the time lag between when you win a contract or when you put capital up front to begin fabrication for project and you actually realize first cash flows?

Well, obviously it depends Jim, on the size of the project and what it is.

Just generally.

I give you an example of the one that I mentioned about the Middle East. This was not a capital call on us. We are selling this plant but it wouldn't make much difference otherwise. We probably started negotiating with this client in the Fall. That we were awarded the work and started the engineering side of this thing. Since this was a sale type thing we need to do get some LCs in place and that was probably the biggest delay. It took a couple months to get the LC's in place before we started to fabricate. If you look at this $25 million project there we feel that from the time we get the order and started talking to them and working on the engineering we are probably talking 10 to 12 months to build it, install it, get it up and running and start recognizing the revenues. It's if a rental we start progress payments, if it's not for sale.

So not a huge disconnect but still a longer time period than U.S. work?

Yeah. These are bigger projects. If you throw in [INAUDIBLE] some of the stuff Beleli (ph) does then of course their backlog is some very big projects and we don't recognize revenue for that sometimes even longer.

Which segues me into the project in the Middle East, would this one, with the help of Beleli (ph) because of the work they have done in [INAUDIBLE] in the Middle East.

This did not came through that this actually came through gas processing side, a knowledge of our gas processing business.

Oh, good.

Once we were involved in that we were able to pull the compression through on that.

Where the Beleli (ph) side is going to work is that obviously we want some locals or national engineers and thing to be manning this plant going forward. Beleli (ph) has a very large international population over there and we will be able to pull five engineers that they know that we can pull into the oil and gas side of the business and use those 2. In fact we are starting to do the training for those people now to be able to handle that.

Should we assume that Beleli (ph) is going to be a long-term piece of Hanover.

A loaded question. I think you have to look Beleli (ph) in a sense that one year ago our back log was $64 million. We did fully control the company at that time we do today and our backlog is $124 million, I believe, with Beleli (ph)

In a better position no matter what you do?

The interesting thing is that we have won orders and now have been prequalified for many of the majors, the U.S.and European integrated majors that we are now qualified to bid on some large reactor and refining type projects. This didn't happen a year ago and we will now been able to prequalify now so that's very important.

Last question. You've been active in Latin America for a number of years. You have a pull in Nigeria and this contract that the Middle East. Where are your two, three biggest growth countries over the next two years?

I think the Middle East. I don't think you can really say a country in the Middle East.

Okay.

If you look at it geographically. And then Russia and, again mostly on the gas processing and treating side of the business, water control type issues, I think that's going to be very big area for us.

Gentlemen, thank you, good quarter.

Our next question comes from Geoff Kieburtz with Smith Barney.

Good morning. Small point, John, on your comments concerning taxes, what were your cash taxes in the quarter? Did you pay any cash taxes?

In the U.S. we paid zero cash taxes. We would anticipate paying over the course of the year over year, worldwide somewhere between 10 and $15 million in cash taxes. But that would all be outside the U.S. That would all be based on earnings in country and what their tax situation is and so forth.

So we are, if I understood you correctly you are not paying, you are paying this 10 to $15 million annually in cash taxes around the world and at the same time accruing in the U.S., you are still accruing some benefit that if you can work out the details of your tax planning you would be able to use those in the future, is that an NOL type of.

You have to split NOL from a tax return standpoint versus a book benefit. Okay? So we are still building NOLs for tax purposes, that's correct. Those NOLs still exist and grow and we have a fairly significant NOL position in the U.S. to utilize, as the excelerated appreciation in terms [INAUDIBLE] and start showing some actual income. If we go to the book side, what's happened is in the U.S. we have wiped out our entire deferred tax liability in the U.S. and this largely was driven by adopting Fin46 (ph) and bringing our synthetic lease on and having that one time cumulative cash up on depreciation. Now we start building a deferred tax asset or a debit on the balance sheet. What the accounting literature tells you is you have to figure out, can you realize that asset? So, yes, we book a benefit and then we look at the benefit and say, are we sure we can realize it and right now we can't demonstrate for certain that we can realize it in the near term. So what go is we reserve that benefit. And that's why in essence reverse the benefit out of the income statement that would you expect to normally see.

I am going to tell you I think I get it but I am going to move on.

I have the same issue with my board and management, so.

Let me move on. I do appreciate it. But I asked the question and you've answered it. I appreciate that. I forget I think, Chad, you noted that the annual report says Hanover is not just a compression services company. Could you elaborate particularly including your comments in regards to integrated solutions, is Hanover going to become not a compression services company?

No, not at all. We still see compression as being the very core part of the business. I think what we see, Jeff, is that especially on the international front, we've had several examples of it, a plant in Brazil that was for the gas site and pulled the compression into it, in a similar plan in Regalos Mexico we won the gas processing side of it and they needed 6,000-horsepower. It's been just the opposite. On another project we had the horsepower in the station but they decided that they needed to do some thing with the gases and the treating of it so we called in the engineers to help with that and we are in the gas treating side of it. This particular Middle Eastern project as we referred to again while we were talking to them they said they wanted to have--trained to have about 200 million cubic feet of gas a day for an [INAUDIBLE] facility and as part of that they needed compression, so we said we can handle that as well. One stop shopping in a sense. Internationally where I think we can continue to be successful.

Okay. I guess then what I'm hearing is that as you stand here today looking forward, you continue to have some opportunities to put compression assets that are idle today back to work but that the larger business strategy here is to almost it sounds like become a gas services company.

I don't want to start getting mired down in terminology here.

And the market your best growth opportunities are those international markets as you mentioned earlier that tend to have a longer lag between capital commitment and cash-flow. Can you just describe how this place out in the context of your greater capital discipline, cash flow generation focus and so ongoing forward? Are we just looking at a more moderate rate of growth going forward than maybe we've experienced with Hanover in years past?

I would say so. I mean, again I go back to the Middle Eastern project in that conversation started off with us at minimum of owning part of that investment, perhaps the compression side and then people would provide the gas plant from us or vice versa. For obvious reasons we have a control on the capital that we are trying to spend and we will look at where we want to take on the projects for the best possible return. And you take Mexico, for example, in Mexico we would rather go into Mexico if we are going to own an asset being a place like a Mexico or a Russia or an Argentina where there is a very large infrastructure of hydrocarbon and business, and if we lease a plant to a client for a five-year lease at the end of that lease we can easily move that plant over for that same client or to another client. And this particular project here we didn't want to put our capital at risk. It's not a huge oil and gas producer in this country. And there is some risk in there. So we chose to say we will build it and operate it for you but you are going to have to, in this case buy it and down the line we may decide that it makes sense to be part owner in another plant and lease it to them. I don't want to give the impression we are giving up on compression at all. That's not the case. We still are placing a lot of units. We still, internationally we still win contracts that are only compression contracts.

Okay. Would you expect that these initiatives, this effort including the integrated solutions will materially change the principal drivers of your earnings and EBITDA generation a year from now or is this something that's going to play out over, say, 5 years?

I think it's going to play out over time. It goes back to the point, how much capital do we have to throw at this? We have a lot of opportunity there's no doubt about that. I think if you look at our international rental today, about 20% of that rental is coming from the gas treating, gas processing side. That's increasing.

Okay. That's helpful. Last question. Raw materials, particularly as there's a larger kind of fabrication, how are you handling? Are you being impacted by raw material price increases, particularly steel? And if so how are you able to pass that through to customers?

Well, we are seeing some steel price increase coming in. Our contracts are very, we are putting a clause in there that these prices are only good for 30 days or I'm not sure, 20 days, 30 days. We have got to some customers on some very recent tenders and told them even though we just submitted this a month ago or whatever we are going to have to increase the pricing. The clients out there are used to this. They are seeing this in their tubulars that they are having to buy. So we have been able to so far, knock on wood, been able to pass the cost on.

Thanks very much.

Our next question comes from Terry Darling with Goldman Sachs.

Congratulations, guys. It's a little strange not to be asking you about some conspiracy issue here and to focus on the outlook but obviously that's a good thing here.

It seems strange not answering it.

Let's ask you about the U.S. pricing outlook first. Do you feel like with utilization ticking up here, gas prices continue strong you are in a position to push pricing a little bit more here?

I think you have to break your fleet down and look at the different areas. I mentioned that we are seeing some company's re-enter the business, people and smaller horsepower and some other thing, there's some pricing pressure that's probably taking place there. The thing that this sales team has really done well over the last year, is break their horsepower down and look at what areas are tight and those are the areas where they are moving towards a price increase. These are always tough questions to ask. How much are you going to get until you are finally there but we do see us better positioned than what we saw even a year ago.

Ok. Secondly I was wondering if you could step us through the significant international projects start ups here over the balance of the year, I suspect that your revenues will kind of lump up here in pieces. You mentioned this quarter coming up, the Brazil compressor station and the Nigeria project start up. Can you step us through the other major ones on the radar screen for the balance of the year?

Well, I want to be a little careful here because some of these we are in negotiation on and working. We can kind of talk about countries a little bit. We have stuff in Argentina that looks interesting to us that we can move fairly fast on. Venezuela, there's quite a bit of interest there. Obviously the Venezuela situation, we are satisfied with what's happening to us down there but we want to be careful to what our exposure is just because we have such a huge exposure down there. Brazil, Mexico, Nigeria we already mentioned that that will be starting up. Brazil is definitely starting up. I think the ones that are actually going to see horsepower startup in the second quarter will be Nigeria and Brazil.

Let me approach it a different way. If you look at this range on capex to 100 to $150 million a very low number in the first quarter might lead us all to focus on the lower end of that range but perhaps you can comment on where your leanings are right now leanings are right now and then break down the maintenance versus a growth, administrative cap effects on the full year basis?

Well I will say a couple of thing and I think John has a comment but John mentioned that this year we really tightened down going out and getting a bunch of work on the first quarter on growth capital. And the reason for that is pretty obvious just to make sure we had control on this. We didn't know what the year was going to be like. We had a few surprises in Hanover in the last 18 months and we wanted to make sure we were in control. And it worked. I think now going forward we will be, we've got a list of projects or potential project out there and we are going through those to see which ones will get us the best return and also where geographically we want to be and makes sense to invest and we will be starting to take some of those projects on. John, do you have?

Just to get to your numbers side of the question there, Terry, I still believe 50 to 60 of maintenance capital with probably about 75% of that being in the U.S. and the rest being on the international fleet. And I still believe that the rest of the growth capital will probably have somewhere about $10 million of what I'd call trucks and shop equipment and Oracle then kind of stuff that we finish up spending on this year so that gets you to the 60 to 70. The rest of the growth capital which is 30 to whatever is probably going to be about an 80, 20 split with most of that 80% being international because that's where our opportunities are now.

That doesn't mean we wouldn't shift that around if there was a great U.S. project that had a great long time to it with a great return but that's where our budget is set up, that's where our focus is set up so I would anticipate the bulk of growth capital to be spent in the second half of the year and I would expect it to be spent largely in international and as a result of the time line Chad has just given you probably won't see much EBITDA impact this year on growth capital and the international front. Does that help?

Yes. That's very helpful. I will finish up with two administrative items here. One is can you tell us what working capital change in the quarter was? And was there anything in the interest expense line that will not recur?

Okay. The working capital for the quarter actually was, we were a negative working capital from the standpoint of we increased working capital by close to $30 million give or take a little bit. Primarily in the receivables area and we anticipate that to be a short term situation. We are aware of what the specifics are there and we expect to see the receivables and the days sales outstanding come back to more normalized numbers in the second and third quarters. So a lot of ramp up activity, a lot of change of what's gone on with new billings going out under Oracle and so forth, the customers getting used to it, walking them through it. So we have a short term blip that we believe will turnaround and that's really the primary cause for the working capital this quarter. I'm sorry Terry, what was the second thing?

Anything on non-recurring in the interest expense line?

No.

Thanks very much.

Our next question comes from Jeff Eberwine (ph) with Cumberland Associates.

Hi, guys, good quarter. You mentioned in the domestic rentals that you had some unusual expenses or you want to call it a timing issue which is high maintenance and repair expense as well as start up costs. Could you quantify that for us?

Probably in the half a million dollars range or so.

For both, together?

Yeah, combined.

Okay. That's all I had. Thanks.

All right, thanks, Jeff.

Our next question comes from Ken Sills with CSFB.

Good morning and congratulations, also.

Thanks, Ken.

I need to go back to this tax issue one last time to try to figure out a cash flow basis. So this quarter you had a $7.6 million tax expense accrual. Are you saying that that's kind of what you expect the run rate to be going forward? Or is it even possible, I mean you said the 7 to 12 cents per quarter. So I'm assuming you are going to have to post an expense every quarter?

Right. You're right. So my point is that, yes, you're right, we accrued 7.6 of tax expense and because we were unable to record a benefit if we used the statutory rate of 35% of about $9.4 million. If we were in a deferred tax liability situation in the company we would have recorded benefit somewhere around $1.5 million to $1.7 million in the second quarter. Instead we reported 7.6 in expense. What I'm saying is as the company's earning profiles changes, it goes up or down according to whatever your projection are, one needs to overlay on top of that somewhere between 7, $10 million of tax expense from what your normal, standard effective rate is that you might use for the company. It's non-cash. You would have to then say, I have to add back the fact that I can't recognize benefit of somewhere between 7 and $10 million of benefit that you would expect to normally recognize.

So if you applied, the 35--the tax rate was also impacted by this as you get close to zero. [INAUDIBLE]

Absolutely.

So if you apply a 35% tax rate to whatever the operating income is, then the 7 to $10 million a quarter is just thrown on top of that.

There you go.

And we can add that back to cash-flow because that's never going to be a cash expense.

That's exactly right.

I think that's about as clear as I--

We will have you teach it from now on.

In a former life I did this and my head still spins thinking about it. Go back to the U.S., the gas rig counts is going very strong, lots of talk about the Rockies being really active. Is the Rockies a big market for gas compression and if the rig count really goes up 40 or 50 rigs there over the summer, what does that do for ya'lls business?

We are doing fairly well in the Rockies. I think that it depends on the reservoir and the bottom hole pressures and everything else on when these wells come on and how long they conduct line pressure and when the compression is needed. It's not immediate. It takes time for that to be required. So, yeah, I think we will see ongoing growth in the Rockies for us.

What kind of, I guess, rig counts or growth assumptions are implied in your basically consistent guidance for the last quarter?

I would, say that again?

What do you mean growth?

What kind of activities levels are you forecasting in the U.S. to come up with your current guidance, flat with where it is? Q1 is better than we thought.

I think we had given guidance for the year that we expected somewhere between 1 to 3% utilization increase or 2 to 4% somewhere in that range, and we have seen 2% utilization increase in the first quarter. We would obviously hope to see more utilization increase over the course of the year so I don't know if you can expect another 2% or another 4%. We just really haven't-- when we put our guidance together what we are saying is somewhere in the 2 to 3% utilization growth for the year that we've already seen. So whether it goes from there or not we'll just have to--

We finished the year 76% and we were looking to hope to be able to finish the year around 79 to 80% utilization where we have our numbers around.

So you made a big step in that direction.

Yeah.

Looking at margins in the U.S., you had a little bit more cost cutting into consolidation than we had originally thought looking back to last summer and yet the margins didn't show that because you are putting more capacity in. So you just think that all that net together you are still going to get back to the kind of margins that you've been guiding to before, there's no change in those targets?

If you really plotted our quarterly backlog and looked at it, backlog recognized 3 or 4 months depending on where it is, 3, 4, months or 5, 6, 9,10 months for Beleli. (ph) It's not recognized in revenue for a period of time. I think if you look at we probably had a low ends backlog in the fourth quarter and started to see some improvement in the first quarter and strong improvement in the second quarter and that revenue started to come into the facilities, January, February, March improving. If you look at it our margins were slightly improved quarter to quarter, I mean month to month. So we think that the second quarter was, we recognize that absorption and everything else. The shops are getting busier. We are adding a second shift in a couple, three of our facilities. So we think that's just going to help us to improve on our margins.

Okay. And Argentina changing their law on gas pricing letting that go up, any timing or estimate of what that impact could be on your opportunities in Argentina?

No, other than we seem to see more excitement down there.

Good news but hard to quantify at this point?

Right.

Thank you.

Our next question comes from Justin Tugman with Simmons and Company.

Good morning. Chad, curious, in the press release you mentioned your focus in the second quarter is going to be on the parts and services business. Can you elaborate on that a little bit?

Well, I think like so many other things, Justin, that took place in Hanover over the last 18 months or so we obviously were focused on certain things and probably not focused on other things. And we believe, the management of the U.S. believes that there is more to gain in the parts and service business out there than what we are getting. And so they have requested to put a couple additional salespeople into that and target it a little more and that's what I am saying we are going to try to focus on that business. A little bit goes back to the BP stuff I talked about, the Conoco Phillips awarding. This is [INAUDIBLE] which fits into parts and service so we are continuing to move down that path to be able to do that. We don't need a [INAUDIBLE] compression we can sustain it or we can own it and rent it to them. That's more where I was coming from on that.

On the domestic side of the business, as utilization continues to increase and you have to bring back some of these idle units, would it be fair to say that the margins will continue to be pressured by some of these additional costs that you incurred in Q1?

A little bit. We have been actively, the other things that's been going on is we've been actively working on a make ready program. As Chad mentioned earlier we really targeted where our fleet is highly utilized and where it's perhaps not as highly utilized and we try to focus on the area where we have high utilization to make or reconfigure units to feed that hot market that we think will be strong for a long period of time. So we've been actually doing that over the last few months and we would continue to do that so, yeah, I think in the near term you'll see some pressure but it's not like we wait, totally to get an order and then say let's go figure out what we need to do. We are actually in process of anticipating and spending. So over the course of the year our exit rate will be stronger margins than where they are today but there's some pressure for the long-term.

Our next question comes from Martha Tuttel with Prudential Financial.

Yes, housekeeping item. You mention that you reiterate your guidance for 2004. Does that mean EBITDA of $300 million?

We said 275 to 315, 280 to 315, excuse me. We gave a range of 280 to 315.

That's your cash tax of 10 to 15 your interest of about 131?

I think our full year interest will be in the, our cash interest because you recognize we have a 20 to 25 a year of pick interest on the former [INAUDIBLE] note. Our cash interest will be in the 125 range to 130 ranges, yes.

Your 100 to 150 of capex?

Yes.

$60 million of free cash-flow, is that pretty much it?

That's how we get our 60 of debt reduction.

Thank you so much.

Okay.

We have a follow up from Justin Tugman with Simmons and Company.

Sorry about that Chad, I got cut off.

We lost you there. We thought we were cut off.

You had made a comment regarding you have seen additional competitors come into the U.S. market. Can you help us to understand what areas these guys are entering in too? Is it the high-end compression, is it the low end? And also maybe in terms of magnitude of what they are actually adding to the market.

Well, it's more in the low end. It's not the large amount of horsepower that they are adding. They predominantly appear to be going after some of the independent, not the majors. That's really all I want to go into on that.

Okay. Then an final question. When you look at your third party backlog, excluding Beleli (ph) of about $97 million, can you give us a sense in terms of when you expect this to shift?

On the compression side, we would anticipate usually your compression is about a 3 to 4 month kind of window so you would anticipate seeing a lot of your compression backlog come through in the second quarter of the production and processing equipment some of that can take longer, it's a little bit lumpier how it's done. So you might see that over a more of a 4 to 6 month horizon.

Thank you very much.

All right.

I would now like to turn the conference back over to Mr. Deaton for any further comments or closing remarks.

I thank you for attending. I think we've probably said enough. Appreciate it. Thank you.

Ladies and gentlemen, this concludes today's call. You may now disconnect.